Randy Cray: Income inequality increases in the United States (column)

RandyCray

On May 3 at the Stevens Point Country Club, UWSP's Central Wisconsin Economic Research Bureau and BMO Harris Bank will present the Economic Indicator Report and forecast for the region. The following is a brief preview of what will be addressed at the meeting.

Across the political spectrum, it's generally conceded that income has become less equal in the U.S. The Gini Index is commonly used to measure the degree of income equality in a geographic area. The range of GI is from 0 to 1.00. A nation or region is said to have a completely unequal distribution of income when the GI equals 1.00 (one group or individual receives all the income), and said to have a completely equal distribution when the GI equals 0 (each group or individual has the same income level). The data from a variety of sources suggest that the income distribution in the U.S. has become less equal in past 30 years.

The most recent and comprehensive data set comes from the nonpartisan Congressional Budget Office. The CBO data show an increase in income inequality over the past 30 years. The CBO used market income in its study, which is income reported on tax forms plus employer-paid health care insurance. In 1980, the GI stood at around 0.48, and by 2008 it reached 0.59. This represents a 23 percent increase in income inequality in the nation in the past 27 years. Excluding capital gains from market income reduces the degree of income inequality. However, the GI for market-based income excluding capital gains has trended higher as well. This means that a rising stock market and capital gains accruing to some households cannot totally explain the upward trend in U.S. income inequality.

Further, the CBO study shows that income has become much more concentrated in the fifth quintile of households. In fact, income accruing to the top 1 percent of households is the major source of the increase in GI. Every quintile experienced a decline in share of market income, the lone exception being the fifth quintile.

The evidence is quite strong in supporting the assertion that income inequality has increased in the U.S. The disagreement, however, centers on whether this development is actually bad for the country. Those who dismiss the rising income inequality as a problem use one or more of the following arguments. Some maintain that you are always going to have winners and losers in an economy; that wealth accumulation is a necessary precursor to job creation; that people frequently are moving up and down the income distribution. Some say even though income is less equal, the standard of living actually is rising for everyone as measured by consumption of goods and services, or that changes in the tax code have caused an underreporting of income for the lower quintiles by ignoring other sources of income such as employer-paid health insurance and that lower capital gains tax rates have encouraged the wealthy to recognize their capital gains. Lastly, those demographics can explain income inequality in the U.S.

Those who think growing income inequality is detrimental to the country counter the above by citing the following arguments: That a winner-take-all philosophy has led to the majority of families becoming marginalized both economically and politically; that we have seen great wealth accumulation with little in the way of high-paying jobs being created; that income mobility in this country has declined to such an extent that mobility is lower here than in many other industrialized countries. Some say using consumption to measure well-being is fraught with data problems and ignores the changing nature of what constitutes a necessity in the modern world, and that household consumption has been artificially supported by increasing debt levels. That tax code changes cannot possibly account for that much misreporting of income. Lastly, studies that use demographic data in explaining income inequality often are misleading because they tend to focus on the level of income inequality at a particular point in time. This means these studies do not do a good job of addressing why income inequality has increased so rapidly over time. In other words, something besides demographics is influencing the situation.

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Randy Cray: Income inequality increases in the United States (column)

On May 3 at the Stevens Point Country Club, UWSP's Central Wisconsin Economic Research Bureau and BMO Harris Bank will present the Economic Indicator Report and forecast for the region.

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